Nabors Industries Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2023

There are 12 speakers on the call.

Operator

Good day, and welcome to the Nabors Industries Limited Q2 2023 Earnings Teleconference. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to William Conroy, Vice President of Corporate Development and Investor Relations.

Operator

Please go ahead.

Speaker 1

Good morning, everyone. Thank you for joining Nabors' Q2 2023 earnings conference call. Today, we will follow our customary format with Tony Petrello, our Chairman, President and Chief Executive Officer and William Restrepo, our Chief Financial Officer, providing their perspectives on the quarter's results, along with insights into our markets and how we expect Nabors to perform in these markets. In support of these remarks, a slide deck is available, both as a download within the webcast and in the Investor Relations section of nabors.com. Instructions for the replay of this call are posted on the website as well.

Speaker 1

With us today, in addition to Tony, William and me, are other members of the senior management team. Since much of our commentary today will include our forward expectations, They may constitute forward looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Such forward looking statements are subject to certain risks and uncertainties as disclosed by Nabors from time to time in our filings with the Securities and Exchange Commission. As a result of these factors, our actual results may vary materially from those indicated or implied by such forward looking statements. Also, during the call, we may discuss certain non GAAP financial measures such as net debt, adjusted operating income, adjusted EBITDA and adjusted free cash flow.

Speaker 1

All references to EBITDA made by either Tony or William during their presentations, whether qualified by the word adjusted or otherwise, mean adjusted EBITDA as that term is defined on our website and in our earnings release. Likewise, unless the context clearly indicates otherwise, references to cash flow mean adjusted free cash flow as that non GAAP measure is defined in our earnings release. We have posted to the Investor Relations section of our website a reconciliation of these non GAAP financial measures to the most recently comparable GAAP measures. With that, I will turn the call over to Tony to begin.

Speaker 2

Good morning. Thank you for joining us today as we present our results and outlook. Our results demonstrate the value of our diversified business portfolio as the environment in Lower 48 remain challenging. Importantly, we continue to generate free cash flow and reduce net debt. For the Q2, adjusted EBITDA totaled $235,000,000 a slight reduction as compared to the prior quarter.

Speaker 2

This result principally reflects the decline in Lower forty eight Drilling activity across both gas and oil basins. Total results for the other segments were in line with our outlook last quarter. Our global average rig count for the 2nd quarter declined by 11 rigs, all of which was attributable to the Lower forty 8. In this macro environment, EBITDA in Drilling Solutions was up in line with our target. Combined, our Advanced Drilling Solutions and Rig Technologies segments accounted for 17% of total EBITDA.

Speaker 2

EBITDA contribution from these two operations was more than $39,000,000 up 6% sequentially. This growth demonstrates continued client adoption of our technology. Notwithstanding the headwinds in the Q2, we generated free cash flow. We achieved this performance even as milestone payments on the new build rigs in Saudi Arabia were greater than expected. Next, I will update the progress we made on our 5 keys to excellence.

Speaker 2

Our success executing these strategies drives value creation across our stakeholder base. The 5 elements include enhancing our performance and technology in the U. S, Expanding our international business, advancing technology and innovation with increasing financial results, improving our capital structure and our commitments to sustainability and the energy transition. Let me update each of these starting with our performance in the U. S.

Speaker 2

Daily rig margins in our Lower forty eight operation improved over the Q1. We continue to realize sequentially higher daily revenue reflecting our disciplined approach to pricing. Our reported Lower forty eight daily rig margin reflects the excellent financial performance of the rigs. On top of that, our Drilling Solutions portfolio generated significant margins. I'll discuss this in more detail in a few moments.

Speaker 2

Now I'll discuss our international drilling business. Daily margins in this segment increased in the Q2 by more than $1,000 Profitability improved in several international markets, primarily in the Middle East. I'll spend a few moments providing an update on the newbuild rig program in Saudi Arabia. The first two rigs deployed in the second half of twenty twenty two. They continue to perform well.

Speaker 2

The 3rd new build deployed during the Q2, so we should see a full impact in the current quarter. SANAD expects to deploy 2 additional new builds over the remainder of 2023. With their attractive financial returns and 6 year initial contracts, These rigs have a growing positive impact on our international results. Looking ahead, construction of the previously awarded second tranche of 5 rigs is underway and initial deployment should commence around the end of the year. I'll finish my remarks on the international business with the recent contract awards.

Speaker 2

In a tender in Algeria, we were awarded 4 rigs. These units are already in the country. We also received an award in Colombia, which will enable us to put a rig back to work there. These deployments of existing idle assets with attractive economics or material wins. We are looking forward to putting them to work.

Speaker 2

Next, let me discuss Our technology and innovation. In our Drilling Solutions business, quarterly EBITDA increased sequentially to nearly $33,000,000 an all time record. NDS growth in the Q2 was led by performance software. Now I will detail the value that NDS generates in the Lower forty eight market. The average daily margin in the Lower forty eight from our Drilling and Drilling Solutions businesses combined was over $20,400 in the 2nd quarter.

Speaker 2

Of that amount, NDS contributed more than $3,500 per day. That NDS total increased by 10% versus the first quarter. In the Q2, the typical Nabors rig in the Lower forty eight ran nearly 7 NDS services. We saw an increase in installations of our SmartSlide directional steering system and our SmartNav directional guidance software. Installations of our SmartPlan well construction engine also grew.

Speaker 2

In the 2nd quarter, NDS revenue on 3rd party rigs accelerated, growing by 18% versus the Q1, a core element of our strategy for NDS targets the 3rd party market. This allows E and P companies to realize the value of NDS technology across all the rigs they employ. As well, Nabors and 3rd party drilling contractors both generate economic benefit from these arrangements. Next, let me update our progress to improve our capital structure. We recorded several accomplishments in the 2nd quarter.

Speaker 2

We generated free cash flow of $27,000,000 We also completed the redemption of our debt that was due in September. And finally, net debt improved in the quarter. I'll finish this part of the discussion with remarks on sustainability and the energy transition. Our three focus areas include improving our own environmental footprint, capitalizing on related opportunities and investing in adjacent leading edge companies. First, I will comment on some Nabors Technologies focused on reducing our own emissions as well as those on third party rigs.

Speaker 2

We expect these products will make increasing contributions to margins in Rig Technologies. First is our PowerTap module. This unit connects rigs to the grid. At the end of June, we had 19 modules running. Over a quarter of those were on 3rd party rigs and we expect further growth in the 3rd and 4th quarters.

Speaker 2

2nd, the Nano 2 diesel fuel additive improves engine performance and reduces emissions. We have already successfully treated more than 20,000,000 gallons of diesel to date on both drilling rigs and pressure pumping units. In the 2nd quarter alone, that total increased by 18%. Quarterly revenue and EBITDA from our Energy Transition portfolio once again increased versus the prior quarter. Customer interest in solutions that reduce fuel consumption and emissions remains strong.

Speaker 2

We Completed additional testing on our new hydrogen injection technology. The goal is to reduce fuel consumption as well as admissions more than proportionally. This system uses hydrogen generated economically at the well site. Testing results are positive. We continue to make progress towards commerciality and the system may have applicability to transportation verticals such as large highway trucks.

Speaker 2

Next, I would like to mention the 2nd Nabors sponsor's SPAC. Earlier in July, Nabors Energy Transition Corp. 2, which trades under the symbol NETDU, completed a $305,000,000 initial public offering. The offering was more than 5 times oversubscribed. This corporate sponsored SPAC is a critical component of our energy transition strategy.

Speaker 2

Net DU enables Nabors to participate in larger scale Synergistic ET Opportunities. Now I will spend a few moments on the macro environment. The recent volatility in commodity prices The many macro factors which you all know well have impacted operator economics and activity in the first half. Notwithstanding oil price pullbacks during the quarter, today's oil price is constructive. The outlook for gas is supported by several large LNG projects.

Speaker 2

These facilities are expected to come on stream over the next 2 years. As their operations commence, they should drive growth in the export market for gas. Although the stage is set for a promising 2024, some overhanging risks remain. These include continued interest rate increases by the Fed, Looming concerns about a recession and the potential for a hard landing and demand from China. On the positive side, there There is a potential for an acceleration of economic activity and tighter global oil inventories.

Speaker 2

Now I will spend a few moments on day rates. Our Q2 results for the Lower forty eight reflect the pricing environment we saw through 2022. More recently, in the Q2, we saw a peaking of rates, particularly in the gas basins, pricing came under pressure in the Q2. I want to emphasize current day rates for our highest spec rigs exceed all of the previous market highs. In this environment, we continue to prioritize revenue and margins, not market share.

Speaker 2

Including the contribution from NDS, our performance against peers remains competitive. In the international market, we see prospects for increases in activity across many of our major geographies. As a group, Operators in these countries remain committed to increasing their productive capacity. This increase in oilfield activity supports generally higher day rates and margin expansion both in the Middle East and Latin America. Once again, we surveyed the largest Lower 48 clients at the end of the second quarter.

Speaker 2

This group accounted for approximately 44% of the working rig count. Our survey indicates the group's year end rig count will be slightly lower than it was at the end of June. This result reflects a mix of operators suggesting increases in activity, decreases and holding flat. Notably, a few operators signal they intend to rationalize activity as they complete acquisitions. The greatest portion more than 40% look to hold activity flat.

Speaker 2

Turning to our international markets, several operators are planning increases in their activity levels. Beyond the 5 recent awards that we announced, We see the prospect for additional awards in our core markets in the Middle East and Latin America. Of course, we also have the 5 additional rigs in 20 24 in Saudi Arabia. As you recall, these generate annual EBITDA of $10,000,000 each. Let me wrap up my remarks with the following.

Speaker 2

In summary, in the current environment, Nabors remains poised to deliver year over year improvements in financial results, increasing free cash flow and greater returns to our investors. Now let me turn the call over to William, who will discuss our financial results and guidance.

Speaker 3

Thank you, Tony, and good morning, everyone. Our results in the Q2 reflected the trends in our global drilling markets. Our international segment was solid, while our technology businesses also delivered sequential growth. These results helped offset the softening rig markets we had anticipated in the Lower forty eight and Columbia. We expected lower drilling activity in the Lower forty eight gas basins, But we must admit that the reductions in oil related drilling we experienced were not anticipated.

Speaker 3

At the current level of oil prices, we would have expected to see increased drilling in all basins. Instead, we saw reductions in oil rig count. Interest rate increases by the Fed and several bank failures during the quarter resulted in increased cost of capital. The increased cost of financing led most of our smaller customers to curtail activity, but larger companies also canceled plans for expansion. These activity reductions were likely the result of concerns about potential recessions in the U.

Speaker 3

S. And in China and their impact on future oil demand. Despite the pause in the Lower forty eight, our operation in that market In the Q3, drilling activity for the market has continued to weaken in the Lower forty sequential decreases in average rig count. But after a tough first half in the U. S, we are now starting to see signs that the market is bottoming with encouraging data points of incremental activity for the Q4.

Speaker 3

On another positive note, We anticipate further strength in international markets with early signs of growth developing into awards for incremental rigs. Drilling Solutions and Rig Technologies are also expected to increase sequentially. Revenue from operations for the Q2 was $767,000,000 compared to $779,000,000 in the 1st quarter, down 1.5%. Revenue in our U. S.

Speaker 3

Drilling segment fell by 10% primarily due to rig count reductions in the Lower 48 markets. This was largely offset by sequentially higher revenue in all of our other segments. Lower forty eight revenue decreased by 10.8% as the current market conditions affected volume and pressure pricing in several regions. Despite these headwinds, daily revenue increased to $36,750 an increase of $300 over the prior quarter. Revenue from our international segment increased by $17,600,000 to 3 38,000,000 or 5.5% for the quarter.

Speaker 3

The improvement in our international drilling revenue was predominantly driven by the Middle East and Latin America. During the quarter, we deployed incremental rigs in Saudi Arabia and Argentina. Activity in Colombia partially offset these gains. As we anticipated, 3 rigs were idled in that country during the second and early third quarter. 1 of these to return to work for another client during the month of August.

Speaker 3

Revenue in our Drilling Solutions segment continued to grow in the 2nd quarter Despite the drilling activity headwinds in the Lower forty eight, 3rd party revenue increased 18% sequentially, accelerating over the growth rate in the Q1 and validating our focus on this market. International revenue also increased as we expanded our footprint in Latin America and the Middle East. In the Rig Technologies segment, total revenue grew driven by international sales of capital equipment and spare parts. Total adjusted EBITDA for the quarter was $235,000,000 $5,000,000 lower than the 1st quarter, at 2.1% decline. U.

Speaker 3

S. Drilling EBITDA of $141,000,000 was down by $15,000,000 or 9.6 percent driven primarily by the activity reductions in the Lower forty eight market. Lower 48 drilling decreased by $14,500,000 or 10.9% compared to the prior quarter. Our average rig count in the Lower forty eight decreased by 11.7 rigs to 81.6 instead of the 8 rig decrease that we expected. Daily rig margins came in at $16,900 up by slightly more than $200 in the 2nd quarter.

Speaker 3

We exited the Q2 with 78 operating rigs. As mentioned, leading edge pricing has peaked and we are seeing reductions in various markets. Given the high cost of moving between basins, pricing has segmented geographically with the gas markets giving back For the Q3, we project our Lower forty eight margin to approach $16,000 per day, reflecting some pricing erosion and increased compensation costs as we expect to carry excess labor in certain regional markets. We also anticipate a further reduction of 7 to 8 rigs in the Q3. On a net basis, EBITDA from Alaska and the U.

Speaker 3

S. Offshore markets remained reasonably steady in the Q2. However, In the Q3, the combined EBITDA of these two markets should decrease approximately $7,000,000 primarily reflecting about 30 days of downtime on our M400 rig in the Gulf of Mexico for a top drive upgrade and the certification of several drilling components. Our International Drilling segment delivered EBITDA of $98,000,000 an increase of $10,000,000 International rig count improved by about 1 rig with the start up of the 3rd San Antonio build in the 2nd quarter and the startup of a unit redeployed from the U. S.

Speaker 3

To Argentina. These increases were partially offset by the release of rigs in Colombia. Average daily gross margin came in at $16,276 an improvement of $10.50 over the prior quarter. We expect international average rig count in the 3rd quarter to increase 1 to 2 rigs on a 4 quarter contribution from the 3rd NUBL start up in Saudi Arabia and the expected start up of a rig in the UAE. We anticipate deploying the 4th Saudi newbuild rig in the 3rd quarter, while the 5th newbuild is scheduled to start before the end of the year.

Speaker 3

We project Q3 international daily margins between $16,016,200 Drilling Solutions EBITDA continued on its upward trajectory, delivering $32,800,000 up roughly 3% from the Q1. Gross margin for NDS held steady at 52%. We continue to see increased penetration of our advanced solutions, particularly in international rigs, with the largest contributions to growth coming from performance software and our digitalization offering. We expect Q3 EBITDA for Drilling Solutions to increase again by approximately 3% over the 2nd quarter level. NDS gross margin per day for the Lower forty reached just over $3,500 a $3.10 increase compared to the Q1.

Speaker 3

This improvement took our combined Drilling Rig and Solutions daily gross margin to $20,407 a sequential increase of over CAD500 per day. Rig Technologies generated EBITDA of CAD6,400,000 a 29.4% increase versus the Q1. The sequential increase was primarily driven by higher capital equipment sales and aftermarketpartsrevenue. Our Energy Transition business also contributed to the growth. For the Q3, we expect Rig Technologies EBITDA to increase by about $3,000,000 Now turning to liquidity and cash generation.

Speaker 3

Free cash flow for the 2nd quarter reached $27,000,000 Free cash flow was impacted by somewhat lower than expected adjusted EBITDA and higher than planned capital spending. Pending for the newbuild rigs in Saudi Arabia accounted for this variance as our supplier reached progress milestones earlier than we expected. It is worth highlighting that while our SANAD JV, as expected, consumed cash in the quarter, free cash flow for the remainder of our business reached almost CAD60 1,000,000 This incremental cash flow supported the redemption in June of approximately CAD52 1,000,000 of notes during September of 2023. At the same time, our revolving credit facility remain undrawn at the end of the second quarter. Net debt at the end of the quarter decreased to $2,070,000,000 We expect 3rd quarter free cash flow to reach approximately $80,000,000 Capital expenditures in the 2nd quarter were $152,000,000 $12,000,000 higher than we anticipated.

Speaker 3

This amount included investments supporting the Sanath Nougall program of $66,000,000 For the Q3, We expect capital expenditures of approximately $125,000,000 including $48,000,000 for SANAD newbuilds. For the full year, we are targeting $480,000,000 of which $180,000,000 support the SANAD Newbuild rigs. Our target for 2023 reflects CapEx reductions both in the Lower forty 8 and Colombia and incremental expenditures for the 4 rigs recently awarded in Algeria. Despite the softness in the Lower forty eight market and to a lesser extent in Colombia, we still expect to generate solid adjusted free cash flow for the full year and to continue reducing our net debt. For 2023, we are currently targeting free cash flow between $300,000,000 $350,000,000 With that, I will turn the call back to Tony for his concluding remarks.

Speaker 2

Thank you, William. I will now conclude my remarks this morning. First, let me summarize our Q2. Our adjusted EBITDA reached $235,000,000 Free cash flow was $27,000,000 Our Lower 48 daily margins reached a quarterly record of 16,890 when combined with NDS, that measure exceeded $20,000 NDS EBITDA set an all time record of $33,000,000 and we reduced net debt. In the U.

Speaker 2

S, we remain committed to a disciplined approach to both pricing and expense control. With respect to our international segment, we have visibility to growth in our major markets, including the already planned commitments in Saudi Arabia. In NDS, our focus remains on increasing penetration on both Nabors rigs and 3rd party units. The international markets are also realizing performance benefits from the MDS portfolio. We are optimistic for future growth in this segment.

Speaker 2

In Rig Technologies, for all of 2023, we expect a growing contribution and we have high expectations for RigTech's energy transition initiatives. We have demonstrated capital discipline and are committed to continue to do so. We expect this will result in continued improvements in our leverage and capital structure. I'm looking forward to reporting our performance in the coming quarters. That concludes our remarks today.

Speaker 2

Thank you for your time and attention. With that, we will take your questions.

Operator

Thank you. We will now begin the question and answer Our first question comes from wakkar Syed with ATB Capital Markets. Please go ahead.

Speaker 4

Thank you for taking my question. Tony, William, I believe you mentioned that the rig count at Q2 end was 78 in the U. S. If that's the case, what's the number right now?

Speaker 3

75, we're current.

Speaker 4

75. And so for Q4, you mentioned that you're Some incremental demand, are you able to maybe quantify that the level of incremental demand and what type of customers are generating that incremental demand?

Speaker 2

So in terms of customers, I mean, the thing that has happened is we've seen a rotation of our customer base again. When we came out of COVID, as you know, there was very strong demand for gas rigs, particularly in the Haynesville area. And that in fact our percentage of gas rigs in the company as a whole was a little over 30%, which is a little higher than what the market was. And that change in fact drove the downturn in the sense that East Texas and South Texas both drove the Klein followed by the Marcellus. And with that changing now, our mix of private versus public has in fact changed.

Speaker 2

The interesting thing is that if you look at December's number versus our June exit number in terms of the non private customer base, You'll be surprised to hear in the oil basin actually our rig count was actually up. So given that We think with the change in the private in the customer base coming out of the privates and people relocating, we were set up in the Q4 for an upturn compared to the Q3. But in terms of specifics, Ed, I can't give you some specifics Other than the fact that the mix has changed, the commodity price is strong and based on the reactions, people feel a little more positive about the Q4, We're not putting a number yet on the magnitude of the upturn for the Q4.

Speaker 3

So we're getting a huge acceleration in request for pricing and rigs for the Q4. But not all of that converts into actual rig count. So at this point, it's a little bit too early to give you the data points, but we're Just feeling good about the Q4.

Speaker 4

Sure. And then from a margin perspective, margin typically lags and you really get the price discovery, even activity actually starts to pick up. What's Your V1 margins and when do you think margins tend to would likely bottom and perhaps roughly around what level?

Speaker 2

Well, when you look at pricing, I mean, I think the good news is that pricing has been relatively well behaved as you can see. And As we mentioned in our prepared remarks, the leading edge rates have been in the low to mid-30s. In fact, we recently signed several contracts squarely in those ranges just last week. So the comment I'm making is that if you look at the leading edge rates, those are actually above Our revenue per day numbers in the second half of twenty twenty two and so which everyone was very excited about. So we think If that all holds, then you should see pretty good traction in terms of the margins Holding up as we're moving forward.

Speaker 2

And yes, so that's what I would say. So now I'll

Speaker 3

make a comment because you mentioned price discovery as rig count increases. I think price discovery has already been quite Prevalent in our fleet already because remember, we didn't have as much term as we did in the past. So we've been 7 months now Living in this environment of lowering and decreasing rig count and pricing has held up pretty steady in the oil basins, Wukar. So what you're seeing now is a fair reflection of What has already happened in the gas basins and we do feel there's still some pain to absorb as more contracts roll into slightly lower day rates that we have today. But you saw what we forecast for the 4th quarter For the Q3, I'm sorry.

Speaker 3

And a part of that is cost, but there will be some pricing deterioration in the 3rd quarter As an average, but it's not as much as you would expect.

Speaker 4

Fair enough. And just last question, Algeria rigs, what's the timing of those the new contract for 4 rigs Getting on revenue?

Speaker 3

Early 2024, we'll start deploying those rigs.

Speaker 4

Great. Well, thank you very much.

Speaker 3

Thank you, Wouter.

Operator

Next question comes from Kurt Hallead with Benchmark. Please go ahead.

Speaker 5

Hey, good morning everybody.

Speaker 2

Good morning, Kurt.

Speaker 5

So I just want to maybe start off on the international front, right. You referenced 4 rigs in Algeria. Obviously, you gave a lot of incremental updated color on the Saudi deployments. So I guess it's safe is it safe to assume that those Algeria rigs will start Start on their projects in the Q4 or is that more of a 2024 event? Just trying to get a sense as to what the

Speaker 2

Yes, I think it's 2024 the Q1 of 2024 right now. That's what it's looking like. And I think If you look through the prepared remarks, obviously, you have some really great visibility in terms of the international rig count. I mean, just working from Our 4th our 2nd quarter average of 77 roughly. When you add in the fact that there's 2 more Saudi rigs going online this year and then 5 Looks like next year because of the acceleration of deliveries, so that gives you 7, 4 in Algeria that's 11.

Speaker 2

We have 2 locked up in combination of South America and Latin America and the Middle East. So that's 13. And then we have some identified opportunities that for at least another half a dozen that we're now Chasing. So, but in our hand is 13 rigs on top of the 77, which obviously will lead in over time in 2024, but I think that that underpins some of our confidence and are feeling good about 2024. The takeaway I have from this quarter basically is that you saw 2 good things.

Speaker 2

You saw that our margins in the U. S. In terms of the The amount of margin demonstrates the quality and the power of our U. S. Position and the quality of the fleet and what we can do.

Speaker 2

NDS hit All time record in a market which was experiencing pushback. And then you see the beginnings of underpinning for the line of sight of international. So That's the 3 takeaways from the quarter's numbers, I would say.

Speaker 5

That's great color, Tony. So, just follow-up On the free cash flow dynamic, obviously, slightly lower than what you were expecting in coming out of the second quarter Simeon, the Q1. So when you think about the progression from here, William, how much of the free cash flow increment, Because it looks like you're going to have to do about $150,000,000 or so of free cash flow in the Q4 to kind of get to that $300,000,000 range. How much of that is going to come from working capital?

Speaker 3

From working capital, Not as much as we thought because the Q4 is now looking a little bit better than we thought. But yes, some of it is coming from working capital, Kurt. Some of that is coming from incremental results and some of that is coming from the fact we don't really pay that much interest in the 4th quarter. So yes, we are targeting around $150,000,000 for the Q4 at this point. The What we're seeing on the free cash though, there's a little bit of uncertainty on the CapEx.

Speaker 3

We have We were used to our supplier in the Middle East and SANAD missing the milestones and therefore we were estimating that we would have a certain number for sign up for the year and for this quarter in fact. Surprisingly, our supplier has been now hitting the milestones and it seems they've got their act together, which is a good thing because we get a rate quicker. But we do have some uncertainty on the CapEx. We thought we would take our CapEx from about $390,000,000 range to somewhere in the $440,000,000 $450,000,000 range, because of SANAD, probably there's a $20,000,000 swing there that we think Now that means the rigs are coming quicker though. So that's a good thing, like I mentioned.

Speaker 3

Algeria, the Algeria contract, we're bringing some idle rigs back into the market, but that requires some CapEx as well. And Tony mentioned about 6 rigs plus of opportunity that we have. Again, this is not a tender. This is something the clients are coming to us and are asking us to do. So it's really a negotiated deal with very high return on capital.

Speaker 3

We haven't decided yet whether we will actually pursue or actually sign those contracts. But If we do, I did include in our forecast for CapEx what the CapEx that we will be required to pursue that work. So that's roughly where you see the reduction in free cash flow from somewhere in the $400,000,000 range to $300,000,000 to $350,000,000 Mostly it's CapEx for additional opportunities and for the Sunland That we haven't really seen in the past quarter.

Speaker 5

Okay, I appreciate that incremental color there as well. And then Just maybe one last just quick follow-up here on you mentioned pricing, you mentioned the range, the low to mid-30s that seems pretty consistent with what the commentary was through the course of most of the Q2. So it doesn't appear like there's really much incremental price degradation. So when you think about the guidance on your cash margins coming down, is that then more The fact that you're keeping people around or how would you attribute that $1,000 a day Is that more of the labor or is it more of the pricing?

Speaker 2

There's obviously some churn here. So for example, I mean, we as I mentioned before, Amongst the majors and large publics and the non privates basically our rig count has been held, but we've actually had to do some relocations. So we've We relocated 4 rigs from other markets to West Texas and those moves by the way were paid for by the cost of the moves were paid for by the operator, but they do invariably result in churn. And then even within West Texas, Even though we've been able to maintain count and operators are really focused On high grading the rigs in this market. And so that also caused some churn.

Speaker 2

So yes, there is some breakage in all these numbers That's what you're seeing in some of our estimates as well.

Speaker 5

Okay, that's great. Thank you.

Speaker 3

Thanks, Bert.

Operator

Our next question comes from Dan Kutz with Morgan Stanley. Please go ahead.

Speaker 6

Hey, thanks. Good morning.

Speaker 3

Good morning, Dan.

Speaker 6

So I'm looking at kind of the first half adjusted EBITDA results in the 3rd quarter guide. I think if my math is right, that kind of would put you at somewhere in the ballpark of 700,000,000 of adjusted EBITDA through the Q3. I think in the past you guys had kind of laid out a $1,000,000,000 target for this year. If there's some growth in the Q4, it seems like you guys might still get close to that number, but just wondering If you could help us at all with how you would frame any updates to that target for the full year?

Speaker 2

I'll take the first part of it, which is NDS, it's always called assets about NDS. And so as you know, we were out there with a target of $150,000,000 for the year for NDS. And at this point, I would say that is probably unlikely given all The pushback and what's happened given in the 1st two quarters and still what's going to continue in the Q3. But I'm reluctant to set a new number and the reason for that is actually Some good news, which is we're seeing really positive traction in NDS, particularly international penetration. And in the U.

Speaker 2

S, We've had really great third party adoption. In fact, our 3rd party numbers gone up 18% quarter on quarter. And so and you also saw some tactical decisions we made with collaboration with some other people like Corva and Halliburton and all those things are militating in terms of hopefully NBS, which was designed to offset decline in recount actually bearing that out. And so That would be the offset to the overall market. So $150,000,000 is unlikely, but we're reluctant to give you what Where the number is yet because we have these offsetting things underway that all look positive.

Speaker 2

So but we it is unlikely to hit the 150. So with that, I'll let William talk about the macro $1,000,000,000 number you're talking about.

Speaker 3

So $300,000,000 in the 4th quarter is also unlikely. However, although we have seen a sharp reduction in rig count in the Lower 48 and probably 10 to 15 rigs short of where we thought we could be at this point. We are being caught by a little bit by surprise on the international market, Not only by the awards, but by recent activity levels, price increases. And so we are pretty happy with what we're seeing on the drilling side on the international and some of that downdraft that we're seeing now in the Lower forty eight is going to be offset by the international markets. So at this point, I mean, what I can tell you is I don't see a pathway to $300,000,000 but I do see a pathway for a fairly robust 4th quarter.

Speaker 6

Got it. That all makes a ton of sense. That's really helpful. And then, I guess maybe just to put a finer point on this, You've kind of already given us all the components we need, but going back to the 3rd quarter Lower forty eight activity guide. So you guys said that you exited the 2nd quarter at 78, you're at 75 today and the guide is for an average of 74 to $76,000,000 That kind of implies to me that maybe the bottom that you're contemplating would still be We still have a 7 handle, kind of still be in the low 70s would be the trough.

Speaker 6

But basically the crux of the question is, Where do you see the lower 48 rig count troughing in the guidance that you put out?

Speaker 3

That's a Tony question.

Speaker 2

Yes. So Putting absolute numbers, I'm really reluctant to do that. I mean, I think the range speaks for itself and I think all the other comments we made. So I don't want to really give a specific number, but I think the range is what we're As you said, so we're at 75 now. We exit the quarter a little bit higher.

Speaker 2

So and you look at that number. So yes, there could be a little bit more downside, but It's I think the range looks good right now. And we think given what's going on with our clients,

Speaker 3

The conversations with our clients, the price of oil right now and the trajectory of production. I think the whole market I think it's getting pretty close to a bottom if it's not already there.

Speaker 2

Yes. And you saw that In the prepared remarks about these with the survey and everything. So and all this is in effect lagging the recent oil price moves. And so When you layer that on top of things, I think that's what gives us some confidence in the rebound in the Q4.

Speaker 6

Got it. Understood. All makes sense. Thanks a lot. I'll turn it back.

Speaker 3

Thank you,

Operator

Our next question comes from Keith MacKay with RBC Capital Markets. Please go ahead.

Speaker 7

Hi, good morning. First, wanted to start on the International Day Margins. So they've come up nicely in the last Several quarters. The Q3 guide looks like it's flattish from Q2, but what is the right way to think about the international day margins Is it really take that 16,000 and layer on the incremental impact of the SANAD rigs coming in at what you've talked about previously as a $10,000,000 per year EBITDA rig number? Or is there Some other nuances we should be thinking about in that day margin as well.

Speaker 3

So Keith, that's a very good question actually. We do expect to have a large number of Saudi rigs with above average margin per day active in 2024, right? And progressively from here to year end and then over 2024. So as we add those rigs, we would expect our margins to go up. Now obviously new rigs coming in come with cost, shakedown periods and things like that.

Speaker 3

So it's not like an automatic that you can just turn the switch and get those higher margins on day 1, but that is a trend you will be seeing. And the other rigs that we're talking about are also in a pretty good range of margin per day. So if anything, we see some upward traction from here to year end in terms of our margins in the international markets and certainly increasing some more in 2024.

Speaker 7

Okay. That's helpful. And William, just for my clarification, the incremental SADI rigs you're talking about, are there additional SADI rigs on top of the SANAD rigs Coming in or is that organic?

Speaker 3

There's more tenders and obviously, we could participate in those. But we haven't really pushed very hard to penetrate those other pockets of the Saudi market. The unconventional market specifically there's a lot of tenders out there. So there's nothing in our forecast today for wins in that particular region. I think that would be quite capital intensive if we were to pursue those markets.

Speaker 3

But yes, there's incremental activity in the Saudi that we haven't really put into our forecast at this point.

Speaker 7

Understood. Thank you. And Tony, in your prepared remarks, you talked a little bit about the impact of recent customer consolidation causing some softness in industry demand for rigs. Can you just talk about a little bit about how you think that dynamic will play out going forward? Do you think there will be an outsized amount of customer consolidation relative to driller consolidation?

Speaker 7

And do you think that will cause any particular impacts on your bargaining power, so to Speak going forward or is it really just going to be a one off dynamic?

Speaker 2

Well, this is the perennial March. I think customer consolidation will continue given the pressure that they all face to be capital efficient And minimize or maximize their use of cash. And so I think that that will continue at a pace probably more so than on the oil for our service side. And the bargaining power has always been uneven and will continue to be. But The consolidation also reads the fact that once these companies get larger, they also look for efficiencies, they also look for high grade in their operations, all things like that, which will drive them to higher quality expectations for their providers.

Speaker 2

And I think that actually plays into our hands. And so our mission is to help them achieve that new consolidation using us as a platform. So We try to turn it into a benefit rather than just a liability.

Speaker 7

Awesome. Thanks very much.

Speaker 3

Thanks, Steve.

Operator

Our next question comes from Arun Jayaram with JPMorgan. Please go ahead.

Speaker 8

Good morning, gentlemen. Tony, I was

Speaker 4

wondering if you could discuss some

Speaker 8

of the competitive dynamics in the Middle East? And just generally, how are you seeing things kind of play out from a potential supply standpoint as you You'd participate in some of those tender activity.

Speaker 2

I missed the question. What was the question?

Speaker 6

The competitive landscape.

Speaker 2

Sure. Competitive landscape. Yes. So obviously The past 10 years, you've seen a real rise in the role of the Chinese drilling contractors in the marketplace there. Their role historically was segmented to the more commodity drilling, but they've actually gotten better as well.

Speaker 2

So they have become a player. And you also see the rise of local national companies either affiliated with NOCs or just locally owned or owned by Sovereign Funds. And so that has affected the landscape and it has become in that sense more competitive. And I think Nabors being there already, I think we've been in a great position to Continue to compete against all those forces, but obviously it has gotten more competitive. And our mission is to differentiate ourselves against all those people, which think one of the reasons why MDS has become so attractive is people really want the technology aspect of what we're providing and that is a true differentiator against all those people.

Speaker 2

Interestingly, virtually everyone I just mentioned to you is actually a Nabors customer directly through either through Canrig or indirectly through NDS. In other words, We're actually helping them provide services on their rig or we're actually providing parts and things like that, either capital equipment or other things. So, it's kind of an interesting dynamic. But I think that's why Nabors, I think, is unique in that international marketplace with all those competitors. I think other people Competing head to head with those people will have more challenges than what we have today.

Speaker 8

Great. Just a follow-up. Tony, about a month ago, you announced an agreement kind of with Halliburton on the automation side. I was wondering if you could maybe elaborate on that agreement, What it means for Nabors? It looks like you're deploying some of this technology in Interact.

Speaker 8

So let me get your thoughts on the implications of that.

Speaker 2

Sure. Well, Like I mentioned before is that growth of the 3rd party marketplace is something that's really important to us as well as offering our clients More streamlined solutions both in our rigs and third party rigs. That transaction like the corporate transaction was part of that. And I'll let Subodh here who actually negotiated it give his additional comments on it.

Speaker 9

Yes, Tony. Thank you for that. So one of the key things as part of a third party strategy is to Partner with the OFS customers who are working with LSTK kind of projects because They as Tony alluded, they are typically using low cost drilling contractors who do not have technology and our solution of providing automation and digital solutions helps them both maximize the drilling efficiency and also get visibility of how the rigs are performing so that they can drive better outcomes for themselves and for manage their air piece better. So our approach with Halliburton and with a few other OFS customers that we are working with is to see how we can empower them with both automation and digital workflows to drive that AFP management by lowering the Drilling Dysfunctions and Maximizing Efficiency. So it has been a great partnership with Halliburton and I think we will continue to add more of these partnerships over the next 6 to 9 months.

Speaker 2

Thanks a lot. And by the way, those partnerships don't just include OSS companies, they actually include other drilling contractors as well who are interested and taking advantage of the same benefits I spoke about, which again is the reason why I think compared to other players in the international arena, We are differentiated offering compared to other people just going in there and trying to compete head to head against local people. I think That basic strategy is subject to a lot of pushback compared to what we're trying to do.

Speaker 8

Great. Thanks, Tony.

Operator

Our next Question comes from John Daniel with Daniel Energy Partners. Please go ahead.

Speaker 10

Hey, guys. Good morning. Thank you for including me. Good morning, John. My first question is related to the inquiries that you're getting in for Q4.

Speaker 10

Can you characterize whether that's well to well work, short term contracts, long term contracts, any color on the duration of the work that would be behind it?

Speaker 2

I'll let Travis comment on it.

Speaker 11

Yes, John. Good morning. It's Travis. Yes, mostly I would say medium to longer term. I mean there's a lot of short term requests So obviously we're going to pick our pick the ones that make the most sense for the business and we're going to put those rigs to work with those partners.

Speaker 11

Okay.

Speaker 10

This will probably be the dumbest question of the day. But it's natural when the commodity price drops that everybody wants a price concession And one of the first things people look at is the day rate. I'm just curious if you could characterize the request for price concessions within just Straight rig market if you will versus the NDS and the difference how they see the technology, the value, That made any sense.

Speaker 2

Yes, John, I'll just stay on

Speaker 11

the subject. I mean, Obviously, yes, we're having some price discussions with our customers. But when we look at our offering on our super specs, I mean our rig platform and our NDS go hand in hand. I mean that's what drives the top quartile outcomes of the high performance that we get on our rigs. So we have those conversations.

Speaker 11

It's not necessarily stations. It's not necessarily discrete rig day rate discussion or an NBS discussion. We it's hand in hand. We've been very successful in terms of holding price and Showing that value. Let me give you an example, John.

Speaker 11

In the last quarter alone, we've increased over 10% and as high as 20% in some of our basins in terms of footage per day. So when you think about well delivery for our customers, we are driving great outcomes for them and that's high value to our customers. So we stand on pretty solid ground in

Speaker 2

And John, you never asked Stupid question. In fact, you're the one guy, every time I read what you write, I learn something. So I appreciate all your musings.

Speaker 10

Thank you. We're trying.

Operator

This concludes our question and answer session. I would like to turn the conference back over to William Conroy for any closing remarks.

Speaker 1

Thank you all for joining us this morning. If you have any additional questions or would like to follow-up, please contact us. And with that, Sarah, we'll end the call there. Thank you very much.

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Earnings Conference Call
Nabors Industries Q2 2023
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